Answer to Question #49687 in Economics of Enterprise for megi

One of the key features of the global economy is that wages of skilled workers have risen relative to unskilled workers in both industrialised and developing economies. Explain why and how this empirical phenomenon is better explained by the Foreign Outsourcing model than by the Heckscher-Ohlin model

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Expert's answer

2014-12-03T11:26:45-0500

International outsourcing involves complexity and risks not found in typical domestic outsourcing. These risks are cultural, political, financial, technological, managerial and legal. Ultimately, these multiple international risks show up in the process of drafting, negotiating and enforcing the contract. Freedom of contract varies according to the governing laws and attacking the legal issues requires initiatives from the beginning. The economic debate about the causes of widening wage inequality may be seen as primarily reflecting differing views on what influences are driving outward the demand curve for skilled relative to unskilled labor. Those who blame trade invoke such an outward shift from trade liberalization and falling transport and communications costs. Those who instead emphasize technology argue that &ldquo;skill biased technical change&rdquo; has caused a rapid outward shift in the demand curve for skilled relative to unskilled labor. For its part, immigration of unskilled labor can shift the relative-skills supply curve backward to the left (by increasing the number of unskilled workers in the denominator), causing the equilibrium skilled/ unskilled wage ratio to rise. In large part there has been a &ldquo;trade versus technology&rdquo; division among economists that has spanned the subdisciplines of labor and trade economics.